Yen Drops to April 2011 Low After Pro-Easing Abe Wins

By Allison Bennett and Joseph Ciolli -
Dec 17, 2012

The yen fell to the weakest level
since April 2011 versus the dollar after Shinzo Abe’s Liberal
Democratic Party won Japanese elections yesterday, giving him a
mandate to act on pledges of expanded monetary stimulus.

Japan’s currency declined as Abe has called for the central
bank to double its inflation goal to 2 percent and undertake
unlimited easing to revive economic growth. Bank of Japan (8301) policy
makers meet on Dec. 19-20. Brazil’s real fell as economists cut
growth forecasts for the nation.

“The yen’s weakness may reach a floor pretty soon, as the
yen’s decline starts to reach 10 percent since October,” said
Ravi Bharadwaj, a market analyst in Washington at Western Union
Business Solutions, a unit of Western Union Co. (WU) “87, which is
still a ways away, is where we see this move ending.”

The yen fell 0.4 percent to 83.89 per dollar at 5 p.m. New
York time, after depreciating to the weakest since April 12,
2011. Japan’s currency dropped 0.5 percent to 110.43 per euro,
after declining to the least since March 21. The euro was little
changed at $1.3164.

Japan’s currency has lost 12 percent this year, the worst
performer of the 10 developed-nation currencies tracked by
Bloomberg Correlation-Weighted Indexes after New Zealand’s
dollar. The dollar is off 3.2 percent while the euro has dropped
1.5 percent. For the past month, the yen is down 5.6 percent,
the greenback fell 2.3 percent and the shared currency is up 1.3
percent.

Real Weak

Brazil’s real declined against all its major counterparts,
falling 0.7 percent 2.0996 per dollar. About 100 analysts in a
weekly central bank survey cut 2013 growth forecasts to 3.4
percent from 3.5 percent a week earlier.

The Dollar Index, which tracks the greenback against the
currencies of six major trading partners, was little changed at
79.560 and touched the least since Oct. 22, as Treasuries fell.
Yields on the 10-year benchmark rose seven basis points, or 0.07
percentage point, to 1.772 percent, a six-week high.

Total foreign holdings of Treasuries rose for a 10th month,
climbing $6 billion, or 0.1 percent, to $5.482 trillion.
Overseas investors held 50.4 percent of the Treasury’s
outstanding public debt in October, the smallest share since
May, the data show.

Central Banks

Central banks worldwide have started shifting away from
inflation targets, which may lead to short-term depreciation in
those countries’ currencies as stimulative monetary policy is
extended, UBS AG wrote today in a note to clients.

UBS raised its one-month euro target to $1.33 from $1.30
and its three-month estimate to $1.30 from $1.25 as the European
Central Bank continued to refrain from cutting interest rates
even as euro-zone countries start running current account
surplus. Meanwhile, the Federal Reserve last week raised its
outright asset purchases and has targeted a 6.5 percent
unemployment rate.

The firm raised its one-month dollar target to 85 yen per
dollar from 80 and its three-month prediction to 88 from 85. The
newly elected prime minister is likely to increase government
bond purchases in addition to imposing a higher inflation
target, UBS said.

Technical Consideration

The euro may advance versus the dollar to the strongest
level in almost 10 months after breaking key resistance hurdles
of $1.3140 to $1.3172, Cilline Bain, a London-based technical
analyst at Credit Suisse Group AG, wrote to clients.

“Last week’s very sharp rally completed a long-term
inverted head-and-shoulders reversal pattern,” Bain said in a
telephone interview. “That suggests that a much longer-term
rally to $1.40 is going to unfold in the next six months.”

Abe’s LDP won 294 seats in Japan’s 480-member lower house
of parliament. Outgoing Prime Minister Yoshihiko Noda’s
Democratic Party of Japan lost three-quarters of its lawmakers,
according to public broadcaster NHK.

“People that fight the Abe government will find themselves
out of control,” said Marc Chandler, global head of currency
strategy at Brown Brothers Harriman & Co. in New York. “Nobody
wants to fight this trend and there is still a lot of interest
to sell yen against dollar and euro on dips.”

The yen earlier fell as much a 1.2 percent against the
dollar, the biggest drop since Nov. 15.

Japan’s currency was the strongest net sold currency today,
according to Bank of New York Mellon client flows. In the past
five days, the cumulative net-outflows are more than three times
as strong as the average during the past year, the bank said.

The yen’s declines may be limited against the dollar as
positioning becomes more crowded. Futures traders increased bets
to the most since July 2007 that the yen will weaken against the
dollar, figures from the Washington-based Commodity Futures
Trading Commission show. Net shorts were at 94,401 wagers on
Dec. 11, compared with 90,326 a week earlier.

The 14-day relative strength index was at 25.3 below the 30
level for a fourth day. A reading of 30 or lower indicates an
asset may have fallen too far too quickly and is due for a
correction. The yen’s relative strength versus the euro was
22.7.